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International banks team up to create digital currency

If you can’t beat them…

Six of the world’s biggest banks have teamed up with UBS to pilot a project to create a new kind of digital cash that is designed to exploit the blockchain technology that already facilitates bitcoin transactions.

Barclays, Credit Suisse, and HSBC are among the major organisations to announce their collaboration with UBS over the ‘utility settlement coin’ (USC), a virtual currency that was originally the brainchild of London start-up Clearmatics. Further discussions with central banks, as well as a review of data privacy and cyber security measures are scheduled but it’s hoped that the USC will speed up settlements and could bring central banks one step closer to the introduction of a formal digital currency.

Head of strategic investment and fintech innovation at UBS, Hyder Jaffrey, said in a statement that discussions would continue over the next 12 months, with the aim of a limited ‘go live’ towards the end of 2018.

Building blocks

It’s something of a volte-face for banks who were initially sceptical of the blockchain system and of its potential for fraud – not to mention their ingrained distrust of non-fiat currencies such as bitcoin.

Blockchain’s algorithms enable cryptocurrencies to be traded electronically using a ‘distributed ledger’ – a network of computers – rather than a central ledger, as in traditional currency trading. This more agile approach opens up new possibilities for banks, including improving the efficiency of back office settlements and releasing the billions in capital that’s currently required to support trades in international markets.

The USC would allow groups to complete transactions in a currency that acts like cash, so slashing the time and cost of the cumbersome clearing process. The digital coins could be converted into a range of currencies and stored using blockchain before being traded for securities.

One step at a time

It’s thought that in the first instance, the USC would be used by banks to pay each other in different currencies, transferring monies between themselves to settle debts. Each USC would be paired with its domestic currency so that spending a USC would be the same as spending its paired real-world currency.

The main advantage would be that USC would be fully asset-backed by cash at the central bank, so that transfers could be effected instantaneously.

Earlier this year, Bank of England governor Mark Carney said that distributed ledger technology (DLT) wasn’t yet ‘sufficiently mature’ to be used by the central bank and there are still concerns over the potential risks of using this system before it has been fully tested. A BoE working paper recently concluded that the ‘technology is still evolving and it is uncertain at this point what form, if any, a DLT-based solution for securities settlement will ultimately take’.

However, Mr Jaffrey stated that the group had ‘a structure that gives us a basis to move on to phase three with a workable structure for reaching settlement finality’. Although he did admit that the USC could lose traction if enough central banks issued their own blockchain-based digital currencies.

Edible cryptocurrency, anyone?

And, for those who’d rather exchange their currency for real-world items, Burger King Russia has issued a billion ‘Whoppercoins’ that are accrued for every rouble spent at the fast food chain and exchanged for an actual Whopper burger via blockchain. Now, that’s progress.